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Regeneration: Those who follow in the family footsteps often must set a new pace

Photo by NATHAN SKID/CRAIN'S DETROIT BUSINESS
COO Mike Kotsis (left) is focused on making better use of technology at Atlas Wholesale Food Co. in Detroit. He
represents the third generation in the family-owned business; his father, Ted (right), is CFO.

Family succession requires clear assessment of skills, interest

Passing control of a family business to the next generation has been the subject of epic movies and melodramatic novels.

Fortunately, in the real world, transitioning generational ownership is much less likely to be fraught with complications — if families follow a few best practices.

“One of the things we encourage — and it's not right in every situation — is to have the kids in the family that are interested in getting involved in the business get a job someplace else completely unrelated to the business,” said Mike Mayette, a principal in the Troy office of financial services firm Rehmann LLC. “So they get used to what it's like working with and for other people ... otherwise, some might get into an entitlement mentality.”

It's also important for the older generation to be clear-eyed in assessing the attributes of the next generation.

“Sometimes it's not a good fit for everybody,” he said. “If a family has four siblings and you kind of create a position for one, just because the other three are very active and contributing a lot, finding a position for someone who's not that interested can lead to problems down the road.”

Aptitude is one part of the equation, said Gregory Drutchas, a principal in Detroit-based TheKitch Firm. The other is interest.

“Recognize early when people are not interested in buying the business,” he said. “One of the things that frequently occurs, and I am just dealing with this, is a person who has a fantastic auto supply business, and the two sons are engineers, and both didn't want to work with dad, or do what dad did. ... I don't think in that case he recognized early enough that the kids were not interested.”

In that case, Drutchas said, it's important to train others to run the company in place of the younger generation.

“The family may want to own the business” but not run the business, he said. “You still have to have people there to step in.”

In grooming the next generation of leaders, it's important to take professional licensing requirements, like those for physicians or accountants, into account, Drutchas said.

“Some are obvious on one level, but some may not be,” he said.

Then there are more tangible elements to a transfer of ownership, Mayette said.

“It's good to work with a team of advisers to make sure that as the actual transfers of ownership take place, it is done in the most tax-efficient manner and that both generations are protected in terms of fairness and equity,” he said.

Nancy Kaffer

In the 1920s, family business in Detroit extended beyond shared genes to shared commodities exchanged throughout the ethnic pockets of Detroit's immigrant community.

For Athas Kotsis, a Greek immigrant and owner of Athens Grocery, business was done with a handshake and mostly with other Greek expatriates.

The Old World business practices continued throughout the 1950s with Athas' sons, who took over the business, then known as Atlas Importing Co.

However, as Detroit's immigrant landscape changed, so did business practices at Atlas. Out were the handshake deals; in were contract agreements, lean distribution, non-Greek foods and a new name, Atlas Wholesale Food Co. Revenue plummeted as the company didn't turn a net profit from 2000 to 2007.

Third generation Mike Kotsis began his role as COO in 2007. His task: to bring new life to the family business.

Second- and third-generation family members have a tough job. Like Kotsis, they may have inherited a business with baggage. Sure, in a perfect world, an old company would be a stable company — free of inefficiencies and sagging profits. But time can take its toll on a company, and it's up to the new generations to move the family legacy forward.

We are family

More than 90 percent of all businesses in the U.S. are family owned, according to the U.S. Small Business Administration.

And 40.3 percent of family-owned business owners plan to retire by 2017, according to the 2007 American Family Business Survey — which surveyed 1,035 family-owned companies that were at least 10 years old and had more than $1 million in annual revenue.

The SBA's Office of Advocacy estimates there were 29.6 million U.S. companies in 2008. Approximately 26 million of those businesses are family owned. If 40.3 percent of those owners plan to retire in the next seven years, then about 10.5 million businesses will change hands by 2017. In many instances, company leadership will move to the owner's kin.

The transition isn't always smooth, as less than one third of family-owned businesses survive second-generation ownership, according to the SBA. Of those that do survive, less than half will survive the transition to the third generation.

“There's always a significant financial issue,” Levitt said. “The older generations are putting the financial stability in the hands of the next generation, and they want to ensure their retirement is secure.”

“There was no succession plan in place,” said Kotsis, 30. “There was no next step on how they (his father and uncles) were going to retire.”

One of Kotsis' first moves was to apply for Walsh College's Extreme Small Business Makeover. This granted Atlas a business assessment and the services of Frank Seyferth, a shareholder and estate planning attorney at Foster, Swift, Collins & Smith PC.

Seyferth, for example, helped transfer the company's assets to Kotsis by redrafting the company's property lease.

“The current generation needed a way to provide for their gradual retirement,” Seyferth said.

Seyferth met with both generations to draft a new buy-sell agreement, which said Kotsis would hit certain goals over a set period of time. When the goals are hit, shares of the company are transferred to Kotsis.

“The new agreement ensures that I'm on the right track, while protecting the previous generation's retirement,” Kotsis said.

Scott Millman, 39, owner and president of Detroit-based Bean Steel Co., assumed leadership of his father's company following his father's death in 2006.

Bean Steel, founded by Millman's grandfather in 1952, operated much like Atlas, relying on word-of-mouth marketing and a solid reputation to galvanize revenue through the 20th century. As the industry experienced attrition at the turn of the century, so did Bean's profits.

“We had a great reputation as a second-tier supplier and had a steady base of customers until they began to go out of business,” Millman said. “I watched the business decline under my father and grandfather because they didn't adapt to modern business practices.”

New faces, new markets

Gary Giallonardo, president and founder of Troy-based business development firm Industrial Visions Co., said previous generations founded their companies within a niche market, making them profitable, but as competition entered their industries, success became more difficult.

“There are all these competitive pressures that didn't exist when dad, grandpa or grandma started the company,” he said. “Now the second, third or fourth generations are left with old infrastructures, old ways of thinking and operating, and trying to make the company profitable again.”

Millman's first task was to hire a sales staff, something the company didn't formally have under his grandfather and father.

Millman used his sales team to move into new markets, including Canada and Wisconsin, and to push new products like galvanized and stainless steel. Diversification paid off. He's grown revenue from $3.4 million in 2007 to a projected $6.2 million for 2010.

New generations are also faced with more technologically savvy competitors than their predecessors and often need to professionalize the business, Levitt said.

“A successful business today requires more structure and processes, and maybe more bureaucracy,” he said. “There's a need for clear goals, metrics and a culture change, which is something the previous generation of entrepreneurs would have cringed at.”

Until the business makeover, Atlas was technologically challenged, Kotsis said.

The company needed new computer-based processes and metric systems to monitor its distribution. So Walsh paired Atlas with UHY International Ltd. to create tracking software, which allowed Atlas to monitor cost per delivery and make adjustments to its process.

Millman, a new member to the Entrepreneurs' Organization, created a Bean Steel website and purchased BlackBerrysfor himself and the sales staff.

“It sounds simple, but my dad would have never carried a BlackBerry,” he said. “The newer generations of owners are more ambitious. My calls begin at 5 a.m. because I'm looking for ways to grow the company.”

“Old habits” are one of Atlas' biggest challenges, Mike Kotsis said.

“Some people here have done business the same way for more than 20 years,” he said. “Every time we implement a new process, employees tend to get stressed and revert to the old process.”

However, by implementing a formal operating structure and moving into institutional food service, Kotsis has been able to return profits — and pride — to his grandfather's company.

Atlas generated $9.5 million in revenue last year, with $10.5 million projected for this year.

“There was no silver bullet (to returning to profitability),” he said. “We had to take a whole different approach on how we looked at our business and turn over a lot of rocks.”

The next generation

Millman is the only member of the founding family to remain with the company. He has three daughters and no intentions of bringing them into the business.

“They're going to go on and do other things, better things,” he said. “Of course, it's sad that the family won't be involved after I'm gone, but I'm putting people in place that will keep the place going and keep the name intact.”

Kotsis and his wife do not have children yet. But he's hopeful that when the time comes, they'll continue the Kotsis legacy.

“It will, inevitably, be up to my kids to decide whether to enter the business,” he said. “If they do, they'll work outside of the business first and get that experience, so if they return here they'll be able to take the company further than I could.”